Bangkok--2 Dec--Moody's Investors Service
Moody's has today assigned an A3 foreign currency issuer rating to PTT Exploration and Production Public Company Ltd ("PTTEP"). At the same time, Moody's has affirmed PTTEP's A2 local currency issuer rating. The outlook for the ratings is stable.
PTTEP's A2 rating combines its underlying credit strength of "7" which equates to an A3 rating on Moody's global scale. It also reflects the company's one-notch rating uplift resulting from the likelihood of the PTT Public Company Ltd ("PTT"; rated A2 stable, and 66% owner of PTTEP) providing credit support in a distress situation.
"PTTEP's underlying credit strength balances its strong cash generation, lower earnings volatility compared to other exploration & production ("E&P") companies, low cost structure and conservative financial leverage, against growing reinvestment risk and recycle costs," says Tony Tsai, a Moody's Senior Vice President and lead analyst for PTTEP. "The one notch support recognizes the strategic importance of PTTEP to PTT, which translates into high incentive for PTT to support the company," adds Tsai.
PTTEP's credit profile continues to benefit from stable cash flow due to its gas sales which are subject to long-term contracts and to prices that are less volatile than crude oil. While demand for gas in Thailand is expected to weaken in 2009 in the wake of the economic slowdown, Moody's expects PTTEP's strong balance sheet to be able to withstand such an impact.
In addition, PTTEP's robust operating performance over the last two years, due to high oil prices and production growth, has enabled the company to deploy much of its strong operating cash flow to fund its development projects. This has enabled PTTEP to maintain conservative financial leverage which is expected to continue over the medium term.
PTTEP'S 66% owner, PTT, is majority owned by the Thai government; as a result Moody's overlays PTTEP's underlying credit strength with a Joint Default Analysis for Government Related Issuers. This involves estimating the likelihood that in the event of impending failure by the company, PTT would step in with assistance sufficient to prevent default. It also asses the level of dependence between the credit profiles of PTT and PTTEP.
PTT's ability to provide such support is measured by its A2 local currency rating. The dependence between PTTEP and PTT is viewed as "high", reflecting PTTEP's close operating and financial proximity to PTT and the strong credit correlation between these two companies. Moody's score PTT's willingness to provide support as "high", recognizing the strategic importance of PTTEP to PTT and ultimately to Thailand, which translates into high incentive for PTT's support. Under the Budget Procedure of Thailand, PTTEP is regarded as a state-owned enterprise.
This combination of its baseline credit assessment (BCA) of "7" and high dependence and support levels result in a final rating of A2.
The stable outlook reflects PTTEP's relative stability of its cash flows and conservative leverage.
The A2 rating could go up if PTTEP develops its growth projects in line with expectation, leading to higher reserves and strengthening of financial profile. Indicators Moody's would consider in this respect include proved reserves increasing to 2.0 billion boe, and RCF-Maintenance Capex/Adjusted Debt trending towards 80% or higher. An upgrade of PTT's rating to A1 or a decrease in the dependency to medium could also trigger an upgrade.
On the other hand, the A2 rating could go down if there are major disappointments in project development, or sustained deterioration in Thailand's domestic gas consumption. Indicators Moody's would consider in this respect include RCF-Maintenance Capex/Adjusted Debt trending towards 50% or lower and full cycle ratio trending above $12/boe. A downgrade in PTT's rating from A2 to A3 or a decline in the support level to medium could also trigger a downgrade in PTTEP's rating.
Moody's last rating action on PTTEP was on November 3, 2005 when the A2 local currency issuer rating was affirmed with a stable outlook.
The principal methodology used in rating PTTEP is Rating Methodology: Global Independent Exploration and Production (E&P) Industry, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.
PTT Exploration and Production Public Company Limited (PTTEP) is engaged in the exploration and production of crude oil, condensate and natural gas. Established by the Petroleum Authority of Thailand (now PTT Public Company Limited) in 1985 as part of a national energy strategy, it is a listed company with PTT retaining 65.7% ownership. PTT in turn is 67.3% owned by the Kingdom of Thailand.
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